Nowadays it’s common for working professionals to relocate due to better career opportunities or other reasons. If you own a property and asked to relocate what do you do? Do you sell the property or rent it out? There is a very strong tax angle in making such decisions:
Tax on House property Let out
When you let out your house for rent then you will receive income which is taxable. The taxable income from the total rent income received in a particular year is computed as follows.
Rental Income Computation
Municipal Rental Value (MRV): Rental value fixed by Municipal authorities based on the periodical survey conducted in their local limits.
Fair Rental value(FRV): It refers to the rental value a house property can fetch. It is based on the rent prevailing for similar type of accommodation in same or similar type of locality.
Standard Rent: It is the rent fixed under rent control Act, where so ever applicable
Expected Rental Value: MRV or FRV which ever is higher is selected and then such higher figure is compared with standard rent and whichever is lower is selected ERV.
Annual Rental Value: It the actual rent received or receivable is ore than ERV such rent received or receivable is annual Rental value.
Municipal Value of House property =10,000 P.M (1,20,000 P.A)
- Fair Rental Value = 12,000 P.M (1,44,000 P.A)
- Standard Rental Value=11,000 P.M (1,21,000 P.A)
- Expected Rental Value =11,000 P.M (1,21,000 P.A)
- Actual Rent Received =13,000 P.M (1,56,000 P.A)
- Annual Rental Value=13,000 P.M (1,56,000 P.A)
- Municipal Taxes Paid=5,000 P.A
Annual Rental Value =1,56,000
Less: Municipal Taxes=5,000
Net Annual Value=1,51,000
Deduction u/s 24:
Standard Deduction 30% of NAV =45,300
Interest on Loan fro purchase of house=Nil
Taxable income from house property = Rs 1,05,700 (1,51,000 – 45,300)
Tax on selling the house property
Let us also quickly consider what happens if you decide to sell your property.
Any profit that you receive by selling any capital asset at a price higher than at which it was acquired by you is a capital gain and is taxable under the head Capital Gains. Capital Gains are of two types.
Short term and long term capital gains
If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss .In case you sell your house beyond three years then it is considered as a long term capital gain/loss.
Exemptions from capital gains tax
If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54 of the Income Tax Act.
You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.
In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.
For Example, if you sell the house property at Rs 50,00,000 in the year 2010-11,which is purchased in the year 2005-06 at Rs.20,00,000
Less: Selling expenses=25,000
Net sale consideration=49,75,000(50,00,000 – 25,000)
Less: Cost of Purchase (with Indexation) =35,02,463
Taxable Long term capital gain=14,97,537
Tax on long term capital is at 20 % i.e. 2, 99,507
Understanding the tax implication on renting or selling a house property keeps you in better position to choose among the two options and also helps in filing your income tax return with clarity
Author: Sridhar Nag
Income Tax Calculator